Delayed Deposit of Employees Contribution to P.F (EPF) and ESI- whether Allowable u/s. 37(1) of Income Tax?

Background: That after the decision of Hon. Apex court in Check mate Services Pvt. Ltd. vs. CIT order dated 12.10.22, the legal position is now settled that the delayed deposit of employees contribution shall be held as deemed income u/s. 2(24) of the income tax act.

Relevant Provisions:

That sections 2(24)(x), 36(1)(va) and 37(1) are reproduced for ready reference:

“2 (24) ” income” includes-

(x) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees;]”

“36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—

(va) any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date.”

“37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.”

That on perusal of aforesaid sections it is discernible:

1. That the Section 36(1)(va) does not operate in isolation , it is the deeming provision of section 2(24)(x) by virtue of which ” delayed payment of employees contribution to PF and ESI” is held as income of the Assessee Therefore once there is a delay in deposit of Employees Contribution to PF/ESI, it shall be held as deemed income.

2. That as per Sec.37 “Any Expenditure” not defined u/s.30 to 36 can be claimed as deduction u/s.37 provided that the expenditure is:

a) not personal in nature;

b) not capital in nature;

c) incurred solely for the purpose of business.

3. That the section 36(1)(va) starts with the words “any sum received by the Assessee” and not any expenditure, hence the restrictions on the expenditures covered u/s . 30 to 36, given u/s.37 may not be applicable to sec.36(1)(va) which deals with Employees contribution to PF and ESI.

4. That in cases where the employees contribution is deposited after due date prescribed under PF ACT), it may be claimed as business Expenditure u/s.37 because there is no such Provision under the Income Tax Act which prohibits allowability of the business Expenditure when the claim is not satisfied in any of the specific section (here section (36(1)(va)).

5. That Hon. Kerela High Court in CIT VS. STANDARD FURNITURE CO. LTD. 116 ITR 751 has held that a claim which cannot satisfy the requirements of any one of the specific sections must not be defeated under the residuary Section i.e. (Section 37) of the Act on the ground that it could well have been fitted into any one of the specific sections.

6. That the observations of Hon. Calcutta HC in LIBERTY CINEMA VS CIT 52 ITR 153 and Hon. Kerela HC in CIT VS. HIGH LAND PRODUCE CO. LTD 102 ITR 803 are note-worthy and hence reproduced as under:

 “It will be, therefore, stultifying sec.37 and its residuary nature if a construction is put on it to mean that, whenever an allowance falls under section 30 to 36, that fact by itself would exclude entertainment of sec.37”.

7. That deposit of Employees contribution to PF is incidental to the business as the expenditure made by the assessee is for running its business and earning profit, accordingly the same must be allowed u/s. 37 under the concept of ” Business or Commercial Expediency “. Reliance is placed on following judgements : a)TRAVANCORE TITAMIUM PRODUCT LTD 1966 AIR 1250 b) SASSOON J. DAVID & CO. Pvt. LTD 1979 AIR 1441 c)CIT VS. WALCHAND & CO. PVT LTD 1967 AIR 1435

8. That recently for the first time such plea, that the amount of delayed deposited when paid by the assessee is an allowable business expenditure u/s. 37(1) as the same is wholly and exclusively incurred for the purpose of business was raised before the ITAT Cuttack in the case of BBG Metal Syndicate Pvt ltd vs. DCIT ITA No. 112/CTK/2022 order dated 17.11.22.

9. That in BBG Metal (supra) the revenue placed reliance on ruling of Hon. Apex Court in Check mate Services Pvt. Ltd. vs. CIT, The ITAT Cuttack considering the fresh plea of the assessee remanded the matter to AO for examination. The relevant observations of Hon. ITAT Cuttack in para 6 of the order are reproduced:

“6. Liberty is granted to the ld. AR to make all submissions in respect of allowability of disallowed contribution of the employees to PF and ESI under other relevant provisions in the interest of justice. This direction is being given because ld. AR has submitted that as the amount is not allowable under section 36(1)(va) of the Act and same is also not covered under section 43B of the Act, the amount of delayed contribution to PF and ESI in respect of employees contribution would be treated as income in the hands of the assessee u/.s.2(24)(x) and on subsequent payment of the same, it would be a business expenditure, which can be claimed u/s.37(1) of the Act. We are not expressing any opinion in regard to his arguments as it has not been examined by the lower authorities. Liberty is also granted to the assessee to raise all arguments as are found necessary by him before the lower authorities.

10. That where an appeal is pending before the CIT(A) or ITAT against the additions made by CPC, it is suggested to raise fresh grounds or claims such as

a) Such expenditure is allowable deduction u/s. 37(1).

b) Scope of adjustment in the Intimation u/s. 143(1) is very limited and can not be made for debatable issues.

c)Interest u/s. 234B and 234A can-not be charged for retrospective operation of Hon. Supreme Court ruling in CHECK MATE (Supra)” That for this proposition reliance is placed on CIT VS. HINDUSTAN ELECTOR GRAPHITES LTD).

11. Conclusion:

i. Once there is delay in deposit of Employees Contribution to PF i.e. the same was not deposited on or before the due date specified under the PF ACT, it will to be held as Deemed Income u/s.2(24)(x) in the hands of the Employer-assessee.

ii. as and when the Employees Contribution is deposited, the Employer-assessee may claim such amount as Deduction u/s. 37.

iii. That means the amount of delayed deposit will be held as Deemed Income and simultaneously it may be allowed u/s.37, therefore the net impact will be nil.

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March 2024